Via Bill Evans at Westpac just now:
We expect the RBA to cut the cash rate by 25 basis points to be announced at 230 today.
We will be very pleased with that result given that we were the first forecaster to pick RBA cash rate below 1% (Bloomberg survey – May 24).
Back in July we were only 1 of 3 (24 in survey) who called October, while we were in the minority on the day calling for no move in May.
We expect that the critical final paragraphs of the Governor’s Statement will be along the lines of:
“Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.
It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
This language is consistent with previous meetings; leaves options open for further moves; but indicates there is likely to be a pause before the next move. The term “if needed” is important in that regard.
Westpac expects that the next move will be in February next year.
Our Strategists Damien McColough and Leila McConnell have analysed the history of market pricing on the day before the meetings.
They point out that there have been seven meetings where pricing was between 70% and 80% for a move.
On three of those occasions the market was wrong and the RBA remained on hold.
Market pricing for today’s meeting is in that 70-80% range.
The relevant meetings where market pricing was not met by the RBA were: February 2010; February 2012; and April 2015.
I had a look at those periods and called on my memory to assess those events.
February 2010.
The RBA had tightened at the October; November; and December meetings in its efforts to move rates away from the “emergency levels” of the GFC.
The conclusion in the minutes of the February meeting was: “Members noted that many market participants expected a further increase in the cash rate at this meeting. They concluded that, on balance, the stronger case was to leave the cash rate unchanged for the time being. This decision would be accompanied by communication that, if economic conditions evolved broadly as expected, further adjustments to policy would probably be needed over time to ensure that inflation remained consistent with the target over the medium term.”
Subsequently they raised rates at the next three meetings so the market was really “unlucky” with that February call but, as always, be wary of the RBA breaking the sequence.
February 2012.
The RBA had cut rates at the previous two meetings and the conclusion in the minutes emphasised that point:
“Members noted that the Board’s decisions in November and December 2011 to lower the cash rate by a cumulative 50 basis points in response to the improved inflation outlook and deterioration in the global economy had been passed through to most lending rates in the economy, which were now around average levels. With growth expected to be close to trend and inflation consistent with the target, the Board considered that this setting was appropriate for the overall macroeconomic outlook. They judged that if demand conditions were to weaken materially, the inflation outlook would provide scope for a further easing in monetary policy.”
Note that the emphasis was on inflation and growth; the Board subsequently waited for the next Inflation Report and the GDP Report and cut by 50 basis points following the Inflation Report – once again the market had the right idea but was thwarted by the quarterly nature of the Inflation and GDP Reports and, clearly, the 50 was a catch up.
April 2015
The RBA had cut in February that year and, remember, at that time inflation was a key consideration. The Board opted to wait another month to see the next Inflation Report; a reasonable decision, and made the cut in May after refreshing its inflation view. The key part of the minutes was:
“Members also saw advantages in receiving more data, including on inflation, to assess whether or not the economy was on the previously forecast path and allowing more time for the economy to respond to the reduction in the cash rate earlier in the year.
So, looking at those three occasions when the market erred there are some ex poste lessons.
The first two, “mistakes” were markets assuming that the RBA would continue a month by month process that had begun – always risky that at some point they would “pause” to reassess – interesting that subsequent actions indicated that markets were correct.
The most recent one was a matter of waiting for more information on inflation – a common practice during the Stevens era.
This decision today does not fall into those categories.
1) there has already been a pause of two months since the last move.
2) because the RBA is now focussing on the labour market and the actions of other central banks there is no need to pause for more data- the Employment Reports are sending a clear message with the data available monthly and the FED/ECB having moved since the last cut in July.
Conclusion
As our Strategists have pointed out confident market pricing is not a guarantee of a move. However, I think the situation today is quite different to those other periods.
Definitely a cut today, in my view.
